SIP vs Lump Sum Mutual Funds: Difference between SIP and Lump Sum Investments

8 min read • Updated 11 May 2023
Written by Anshul Gupta

A mutual fund is an investment vehicle which pools money from multiple investors. The collective funds are then invested in various assets such as stocks, bonds and other asset classes. 

While Mutual Funds have gained immense popularity in recent years, you should remember that all your investments should align with your income, expenditures, risk profile, and financial goals. Based on these factors, you can invest in mutual funds in two ways: via Systematic Investment Plans (SIPs) or lump sums.

Read further to learn more about the differences between SIP and lump sum investments, and gain insights into them.

What Is the SIP Method of Investment?

An SIP is an investment facility which enables individuals to invest small amounts of money in mutual funds at regular intervals. The intervals may be monthly, quarterly, semi-annually or annually.

On activating a systematic investment plan, a fixed amount gets deducted from your bank account periodically. This helps to instill a sense of financial responsibility among investors.

Moreover, one does not require a large sum of money to invest using SIPs. It takes an amount as low as Rs. 500 per month to start an SIP investment. Certain mutual funds also allow investment via SIP with a sum of Rs.100. 

Why choose SIPs?

  • Lower Investment Amount: One can start investing via SIPs with as little as Rs. 500 a month. It is a viable option for many.
  • Rupee Cost Averaging: Since the payments in SIPs are done during different market circles, the unit costs are averaged out. When the market has fallen, you will be able to buy more units. Likewise, you will buy fewer units when the stock markets start rising. It will help in reducing the per-unit cost of purchasing the units. 
  • Power of Compounding: SIPs benefit from the power of compounding since the capital gains are reinvested in the scheme.

What Is the Lump Sum Method of Investment?

A lump sum investment method requires individuals to deposit a large sum of money in a single payment. It is a good option for investors with long-term investment goals, higher risk tolerance and a thorough knowledge of the market. 

A lump sum or one-time investment can be convenient if you don’t want to worry about installment dates and saving every month to invest. The minimum amount for a lump sum investment is Rs. 5,000 for most fund houses.

Why choose lump sum payments?

  • Convenience: When investing with a lump sum, one does not need to keep track of payment due dates or put money aside each month.
  • Investment of a Sizable Sum: Using this type of payment, one can make a sizable investment all at once. This investment’s worth rises significantly as the market expands. The bare minimum for lump-sum investments is Rs. 5,000.
  • Long-term Objectives: Investing via lump sum can be a smart option for long-term investment objectives. For investments made with a lump sum, a 10-year time horizon is recommended.

Key Differences between SIP and Lump Sum Investment Modes

The following are the main differences between lump sum and SIP in mutual funds:

AspectSIP (Systematic Investment Plan)Lump Sum Investment
DefinitionIn SIP, individuals are required to invest small sums of money at regular intervals. These payments are subtracted from the investor’s bank account monthly, quarterly, semi-annually or annually.Lump sum investments involve investing a large amount of money in a single payment. Therefore, the timing of market strategy is crucial for lump sum investments.
Risk associatedSIPs carry a low to moderate amount of risk. This is because the investment period is spread out which reduces the risk of market volatility.Lump sum investments carry moderate to high risk.
CashflowThey suit those with regular cash flow.They are a one-time payment.
FlexibilityThey are considered a more flexible mode of investment as you change the amount and payment frequency during the tenure.Lump sums are not considered flexible as you have to make the entire payment in one go.
Market surveillance requiredInvestors should keep tabs on the market performance on a regular basis as they can enter various market cycles during their SIP tenure. However, you don’t need to closely monitor the market while starting the investment. Doesn’t require monitoring the market during the investment tenure. However, you need to monitor the market while entering the investment. A continuously growing market would help avoid volatility whereas a falling NAV market can provide a negative impact on investment.
Financial disciplineInvestors develop financial responsibility while investing via SIPs due to regularly planned payments.Many people forget to invest regularly via lump sum payments.
Unit AllocationUnit allocation is based on the NAV during each installment.Unit allocation is based on the NAV of the mutual fund during that particular time.

Things to Consider Before Investing

Since mutual funds are directly related to the market, they are subject to market risks. Hence, an investor needs to consider some essential factors while deciding the correct mode of investment for them. These are:

  • Financial Standing: Investors need to assess their financial capabilities before making an investment. SIPs are usually a viable option for those who cannot invest a large amount at once. However, a lump sum investment may be a good option if you have significant funds.
  • Personal Situations: Investing via lump sum takes a huge amount of money at once. To be on the safe side, keep a backup fund for any unexpected circumstances.
  • Market Timing: For experienced investors who have knowledge of the markets, a lump sum is a good option. During market lows, they generate good returns. However, for an investor who cannot identify market cycles, SIPs are a safer option.
  • Risk Tolerance: For high-risk individuals, equity funds are a good option. However, for people with a low-risk appetite, debt funds are on the safer side.

Taxation on SIP and Lump Sum Investments in Mutual Funds

While learning about the difference between SIP and lump sum, one should look into the taxation rules for both. 

The tax for lump sum investments are:

  • Taxation on dividends: Since the Union Budget 2020, the tax treatment of mutual fund dividends depends on the investor’s income tax bracket.

Dividends used to be tax-free when companies paid the Dividend Distribution Tax before sharing their profits with investors. Now, dividends received by investors are added to their taxable income and taxed at their respective income tax slab rates.

  • Taxation on capital gains: The holding duration of your mutual fund investment determines the capital gains tax. Tax rates for long-term and short-term investments are different.
  • Equity fund short-term capital gains (STCG) are taxed at a flat rate of 15% for a holding period under a year. However, long-term capital gains (LTCG) tax is charged at a rate of 10% over Rs. 1 lakh.
  • STCG from debt funds is taxed as a part of the investor’s taxable income for investments lasting less than 36 months. Long-term capital gains tax (LTCG tax) is applicable for a longer holding period at a 20% rate after indexation.

The taxation of SIPs differs in certain ways:

Since SIP payments are spread throughout a tenure, each installment is considered a separate investment for tax purposes. For instance, suppose you invest via SIPs in an equity MF for 13 months and decide to redeem your units. Returns from units held for more than a year will be considered long-term capital gains and taxed at the respective rates. The remaining units will be taxed at the rates of short-term capital gains tax.

Final Word

Both lump sum and SIP investment methods have their own advantages and disadvantages. Therefore, no single investment method is suitable for all individuals and situations. However, it is first important to know the difference between SIP and lump sum investments in mutual funds.

Frequently Asked Questions

  1. What is the NAV of mutual funds?

NAV (Net Asset Value) is the price at which investors can buy or sell mutual fund units. The NAV is updated daily, and it keeps changing. During an SIP tenure, the NAV fluctuates, and the cost of units differs during each installment.

  1. Is SIP better than a lump sum investment?

Both SIP and lump sum have their own benefits and cannot be compared. The suitability depends completely on the individual investor and their investment goals. Both are excellent options.

  1. What are the average returns on SIPs?

The performance of mutual funds depends upon the performance of their underlying assets. However, a longer investment tenure gives better returns.

  1. Is it possible to invest monthly in lump sums?

This depends on your financial position and long-term goals. If you can afford to pay lump sums each month without trouble in your everyday life, then you can opt for this method rather than SIPs.

Was this helpful?

Anshul Gupta

IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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